Fourth Circuit Creates Circuit Split in Virgin Islands Tax Case

Apr 17, 2012   

On April 16, 2012, the Fourth Circuit Court of Appeals based in Richmond, Virginia affirmed the decision of the Tax Court denying the motion to intervene filed by the Government of the U.S. Virgin Islands (“GVI”) in McHenry v. Commissioner of Internal Revenue, case nos. 11-1239, 11-1366.  As we previously blogged, the Tax Court held that the GVI could not intervene in a Tax Court case of a taxpayer who was a resident (or former resident) of the USVI and claimed tax credits under the USVI’s economic development program.  In the McHenry case, the Tax Court held that its prior opinion in Appleton v. Comm’r, 135 T.C. 461 (2010) available here, was controlling and that the GVI could not intervene to challenge the IRS’s position that the statute of limitations contained in IRC Section 6501 applied to those taxpayers residing in the USVI. 

Previously, the Third Circuit Court of Appeals and the Eight Circuit Court of Appeals had reversed the Tax Court’s ruling on the issue of whether the GVI could intervene. According to the Third and Eighth Circuits, the GVI should have been permitted to intervene. The Third Circuit’s opinion is available here, and the Eight Circuit opinion is available here.

In its ruling in McHenry, the Fourth Circuit gives the Third and Eighth Circuit decisions little more than lip service, relegating both to a single footnote.  According to the Fourth Circuit, because the GVI does not administer IRC sections 932 (which provides for a tax filing with the USVI) or 934 (which authorizes the USVI to provide tax credits under the economic development program), intervention would be inappropriate.  The Fourth Circuit distinguished the Third Circuit’s opinion in Appleton by noting that the Third Circuit “stated conclusorily” that Rule 24(b)(2)’s requirement that the Virgin Islands administer the statute at issue "appears to be satisfied, as Appleton’s tax assessments are based on an income calculation which takes into account credits created pursuant to 26 U.S.C. § 934, under the [Virgin Islands’ Economic Development Program]."  Slip op. at 13. 

The Fourth Circuit further held: “Moreover, we conclude that the Third Circuit was incorrect in assuming that the tax credits claimed by Appleton were ‘credits created pursuant to I.R.C. § 934.’ Instead, they were credits created by the Virgin Islands for taxes payable to the Virgin Islands pursuant to the Economic Development Program and the Virgin Islands’ tax laws. Those Virgin Islands credits were in no way implicated in Appleton’s statute of limitations defense under U.S. tax laws, nor are they in McHenry’s defense.”  Slip op. at 14.

A full copy of the Fourth Circuit opinion is available here.

The most obvious takeaway from the McHenry opinion is that now in USVI residency cases, the GVI will be allowed to intervene in the Third and the Eight Circuits, but not in the Fourth.  There are currently 3 cases pending in the 11th Circuit on this same issue, so it is yet to be determined how this issue will be resolved in the Court. We will monitor this issue closely and update our blog with more information as soon as it is available 

The attorneys at Fuerst Ittleman have extensive experience litigating against the IRS and the Tax Division of the U.S. Department of Justice, including USVI residency cases.  You can contact an attorney by calling us at 305.350.5690 or by emailing us at: